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MF GLOBAL The Lay of the Land and Lessons Learned March 23, 2012. Michael R. Stewart - Partner | +1 612 766 7928 Faegre Baker Daniels llp Minneapolis, MN. MF Global - Background .

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mf global the lay of the land and lessons learned march 23 2012

MF GLOBALThe Lay of the Land and Lessons LearnedMarch 23, 2012

Michael R. Stewart - Partner | +1 612 766 7928Faegre Baker Daniels llpMinneapolis, MN

mf global background
MF Global - Background
  • MF Global Inc. was a commodity broker, securities broker and future commissions merchant.
  • As of March 31, 2011: Total assets of $28.3 billion, total liabilities of $27.4 billion, U.S. segregated funds of $8.5 billion and foreign secured funds of $1.1 billion, for total customer funds of $9.6 billion.
mf global background1
MF Global - Background
  • By August 31, 2011, total segregated funds were $7.3 billion.
  • October 31, 2011, 150,000 customers.
  • October 31, 2011, total customer property supposed to be $5.45 billion.
what happened
What Happened?
  • Confluence of factors led to MF Global collapse.
  • Large positions in European bonds held by MF Global.
  • In October 2011, MF Global announced it had a loss of $187,000,000 as a result of European sovereign debt write downs.
  • Margin calls and demands by counterparties for collateral.
  • Customers began withdrawing funds and closing accounts.
what happened1
What Happened?
  • October 27, 2011, rating agencies cut MF Global credit rating to junk status.
  • Ratings downgrades “sparked an increase in margin calls” that were “threatening overall liquidity,” Bradley Abelow, MF Global’s president and chief operating officer, said in the company’s bankruptcy filing.
what happened2
What Happened?
  • $105 billion in cash transactions in final week.
  • $100 billion in securities transactions in final week.
  • “Fail” transactions were five times normal volume in last week.
  • Shortfall in 4(d) customer funds began on October 26, 2011 and continued until bankruptcy on October 31, 2011.
mf global liquidation proceeding
MF Global Liquidation Proceeding
  • October 31, 2011, Securities Investor Protection Corporation (“SIPC”), working with the Commodity Futures Trading Commission (“CFTC”), Securities Exchange Commission (“SEC”) and Chicago Mercantile Exchange (“CME”) placed MF Global into liquidation.
mf global liquidation proceeding1
MF Global Liquidation Proceeding
  • SIPC filed petition for protection under Securities Investor Protection Act (“SIPA”) in Southern District of New York.
  • Court entered order for protection, appointed James W. Giddens as trustee and transferred case to Bankruptcy Court for Southern District of New York.
sipa liquidation proceedings
SIPA Liquidation Proceedings
  • Because MF Global was a registered securities broker-dealer and SIPC member, as well as a future commission merchant, it is being liquidated pursuant to the provisions of SIPA.
  • SIPA emphasizes protection of and return of customer property to commodities customers and securities customers.
sipa liquidation proceeding
SIPA Liquidation Proceeding
  • SIPA proceeding is a liquidation proceeding.
  • Trustee’s duties are to marshal assets and recover customer property, return property to the extent possible to customers either through account transfers or by a claims process, determine other claims as in bankruptcy, and liquidate the business of the debtor.
sipa liquidation proceeding1
SIPA Liquidation Proceeding
  • The Trustee’s duties to commodities customers are governed by the provisions of the Bankruptcy Code applicable to commodity broker liquidations and CFTC regulations implementing those provisions to the extent they are consistent with SIPA.
  • Trustee’s duties to securities customers are governed by SIPA.
sipa liquidation proceeding2
SIPA Liquidation Proceeding
  • SIPC covers shortfalls in securities customers accounts up to $500,000 per customer.
  • No similar protection for commodities customers.
  • Trustee to return securities customer property to securities customers and commodity customer property to commodities customers.
  • Customers share in their respective pools pro rata.
mf global pools of property
MF Global Pools of Property
  • Trustee estimates a $1.6 billion shortfall between commodities claims and assets currently under trustee’s control.
  • MF Global proceeding involves primarily four separate estates or pools of property, with separate claimants or creditors against each pool.
  • Three pools of property for commodities customers.
  • Pool of property segregated pursuant to section 4d of the Commodity Exchange Act, attributable to property and collateral for commodity customers with U.S. futures positions (“Segregated Funds”).
  • Pool of property separately maintained and distributed among commodity customers with claims for property and collateral for foreign futures positions (“Secured Funds”). 17 C.F.R. Section 30.7.
  • Delivery class, primarily consisting of physical customer property
mf global pools of property1
MF Global Pools of Property
  • Pool of property maintained for the exclusive benefit of securities customers, representing customer property as defined by SIPA, including property that was or should have been segregated or held in reserve accounts for them.
  • General estate property.
mf global pools of property2
MF Global Pools of Property
  • General estate property available to satisfy administrative claims, claims of general creditors (e.g., landlords, suppliers, vendors, employees, lenders to MF Global, intercompany claims, etc.) and claims of securities customers and commodity customers to extent pools of property segregated for their benefit insufficient to satisfy customer claims.
mf global pools of property3
MF Global Pools of Property
  • Under appropriate circumstances, action may be taken to restore customer property which is no longer in segregation, and general estate property may in some circumstances be allocated to the appropriate pool of customer property where shortfalls would otherwise exist.
distributions to mf global customers
Distributions to MF Global Customers
  • 4d assets marshaled by trustee: approximately $5.3 billion.
  • Trustee has made three separate bulk transfers to FCMs, resulting in a distribution of about 72% of segregated property to commodity customers: nearly $4 billion.
  • Motion pending for an additional distribution of $600 million to get to 80%.
  • First bulk transfer:November 2, Court authorized trustee to transfer customer accounts with open U.S. commodities positions, along with approximately $1.55 billion in collateral.
distributions to mf global customers1
Distributions to MF Global Customers
  • Second bulk transfer:On November 17, Court authorized trustee to make bulk transfer of 60% of the cash attributable to commodities accounts holding only unencumbered cash, or cash equivalents. The cash transfer totaled approximately $500 million.
distributions to mf global customers2
Distributions to MF Global Customers
  • Third bulk transfer: On December 9, Court authorized trustee to make bulk transfer and distribution of up to $2.2 billion to former MF Global Inc. retail commodities customers with US futures positions, which should result in those account holders receiving approximately 72% of their property.
  • Aided by $550 million guaranty by CME to trustee.
  • CME guaranty kicks in only if actual segregated funds available for distribution is less than total distributions after third bulk transfer.

First interim distribution on undisputed customer claims: On March 15, motion filed to approve an additional $600 million distribution to allowed claims.

distributions to mf global customers3
Distributions to MF Global Customers
  • Securities Customer Bulk Transfer: On December 9, Court authorized trustee to sell and transfer approximately 330 active retail securities accounts, which is substantially all of the securities accounts at MF Global Inc. Securities customers received 60% or more of their account value, and 85% of the securities customers received 100% because of SIPC coverage.
distributions to mf global customers4
Distributions to MF Global Customers
  • Secured Funds: No transfers to date of Secured Funds. Motion filed to approve $50 million distribution. Funds necessary to satisfy Secured Funds are held predominantly by foreign administrators, principally in the United Kingdom and Canada, and are not under the Trustee’s control. $700 million in dispute.
  • Foreign administrators have informed the Trustee that they dispute his right to the immediate return of these funds and do not necessarily regard them as having been held in strict segregation for U.S. account holders.
  • Approximately $878 million in customer obligations – trustee has recovered approximately $63 million.
claims process
Claims Process
  • November 22, Court enters order approving claim forms and setting claim filing deadlines.
  • Deadline for securities and commodity customers to file claims for return of customer property was January 31, 2012.
  • Deadline for general estate creditors to file claims is June 2, 2012.
  • 25,154 commodities customer claims and 841 securities customer claims.
claims process1
Claims Process
  • Trustee will review claims.
  • As of March 2, notices of determination had been mailed for 12,146 claims.
  • 12,143 claims allowed in whole or in part, and 3 claims disallowed. Average allowance is 98%.
  • No specified date by which trustee must complete claim review.
  • If trustee disagrees with filed claim, trustee to send claim determination letter to customer.
claims process2
Claims Process
  • If customer receives claim determination letter and customer disagrees with determination, customer must file a written opposition to the trustee’s claim determination within 30 days after the date of the claim determination letter.
  • Trustee to schedule hearing with Court within 120 days after customer files written opposition to trustee’s claim determination.
  • Issues with Trustee’s request for release (and assignment of claims) by customers.
  • Claims traders.
next steps
Next Steps
  • Trustee to complete investigation of what happened and report to Court.
  • Trustee to identify what happened to customer funds.
  • Trustee to take steps to try to recover funds for benefit of customers and creditors.
next steps1
Next Steps
  • If appropriate, trustee may commence litigation against third parties to recover improperly transferred funds, fraudulent conveyances and preferences.
  • If appropriate, trustee will pursue claims against third parties whose actions may have damaged MF Global.
  • As trustee identifies and collects additional customer property, trustee will seek further Court authority to make additional distributions to customers.
  • If appropriate, trustee will decide, with Court approval, whether general estate property should be used to increase funds of customer property.
lessons learned
Lessons Learned?
  • Loss of confidence.
  • Monitoring of FCM’s financial condition, business practices and strategies.
  • Diversification of account relationships.
  • Periodic sweeps of excess equity.
  • Review of risk management policies.
  • Banks more attentive to borrowing base issues and advances against net equity in trading accounts.
  • Legislative and industry initiatives.
website links
Website Links
  • SIPA Trustee: www.MFGlobalTrustee.comJames W. Giddens, the Trustee for the SIPA Liquidation of MF Global Inc. c/o EPIQ Bankruptcy Solutions, LLC FDR Station, P.O. Box 5082 New York, New York 10150 Phone:  1-888-236-0808 E-mail:
  • CME Group:
  • Commodity Futures Trading Commission:
  • Futures Industry Association:
  • MF Global Bankruptcy Court Proceedings:
  • MF Global Bankruptcy Trustee:
mf global the lay of the land and lessons learned march 23 20121

MF GLOBALThe Lay of the Land and Lessons LearnedMarch 23, 2012

Michael R. Stewart - Partner | +1 612 766 7928Faegre Baker Daniels llpMinneapolis, MN